FCA addresses potential abuse of ‘second line of defence’

Late in January this year, a ‘Dear CEO’ letter was sent to provider bosses setting out expectations that firms should ask clients specific questions around their circumstances, give relevant risk warnings and refer to guidance services or regulated advice.

This was to ensure customers get the best outcomes when the new retirement freedoms come in from 6 April.

FTAdviser asked the industry how they viewed the ‘second line of defence’, with concerns raised that adequate safeguards may not be in place and that providers may use this as a means of retaining business.

Henry Tapper, founder of auto-enrolment service Pensions PlayPen, said that insurance companies have now been given carte-blanche to put the shutters up.

“The unintended consequence of this ‘second line of defence’ stuff was a godsend for any insurance company who hasn’t bothered to make the effort to provide the freedoms and/or the guidance to go with it.

“They can say ‘not so fast, you are taking your money away from us we’d like to put a few barriers in your way before you take these decisions you should be aware of the costs, the risks the facts’.”

Mr Tapper added that he could see that a lot of insurance companies would be looking to protect their books, leading to frustration about people not being able to take their money out. “I think there is a big risk that people will have difficulty moving their money about,” he added.

Jonathan Purle, principle consultant at Waterside Gate Consulting, said there would inevitably be a bottleneck while life companies get their heads round implementing the second line of defence.

“When it comes to the second line of defence I’ve got no doubt that there will be people in life companies that use it to talk people out of transferring money away from them. The older, more established life companies and certainly the ones with closed books [are more likely to do this].”

When these concerns were raised with the FCA, the regulator responded by saying that to ensure appropriate protection of consumers and to assist firms, the organisation will be publishing further details of what it expects firms to do by the end of this month.

A spokesperson explained: “These rules will, by April, mean that when a customer contacts their pension provider to access their pension, providers will be required to ask the consumer about key aspects of their circumstances that relate to the choice they are making.

“In addition to this, firms have a responsibility to treat their customers fairly. Part of that is ensuring that consumers do not face unreasonable post-sale barriers to change product, switch provider, submit a claim or make a complaint.”

A spokesperson for Zurich said that the FCA’s announcement made it clear that providers have an “important role” to play in ensuring consumers understand outcomes. “However, we are very conscious that customers will not want barriers placed in their way if they wish to exercise their new options from April onwards.

“It is the client’s money, not ours, and so we are keen to ensure there is a balance between helping customers to achieve a good outcome and delivering a positive customer experience that is not overly demanding.

An Aviva spokesperson responded: “Aviva is committed to supporting customers through the freedom and choice changes and this includes ensuring our approach to the ‘second line of defence’ works effectively and appropriately for savers.”

ruth.gillbe@ft.com